EPAct 179D Experts

"The least expensive kilowatt, is the one not used."

- Jacob Goldman

How to Integrate the New EPAct and Roof Solar Tax Incentives Effective January 1, 2016

EPAct-and-Roof-Solar

New EPAct and Roof Solar
Tax Incentives

Developments in roof and solar tax
incentives are driving warehouse retrofits that result in
large energy savings supported by substantial federal tax
savings under the Energy Policy Act (EPAct) Section 179D. As
part of the 2015 yearend tax extender package, EPAct tax
incentives for lighting, HVAC, and roofs were extended for two
years through December 31, 2016 and an enhanced solar tax
incentive was extended through 2021. When roof replacements
and upgrades are required, the most optimal economic results
can be obtained by integrating these two tax incentives.

Roof Solar Photovoltaic
Panels

The amount of solar photovoltaic (PV)
development has increased throughout the past few years.
Several states in the United States are paving the way for
solar PV development, includingMassachusetts,
New Jersey, California, New York, North Carolina, Hawaii and
Colorado.
Some of the best
buildings for solar installation are warehouses and
manufacturing facilities because of the large amount of roof
space that allows for numerous solar panels. Solar panels are also
placed close to an electric load, which is the building
itself, so the energy doesn’t have to travel to distant
locations.i
The price of solar
panels has become more affordable for owners to purchase. With
the combination of lower prices and tax incentives, now is the
best time to include the addition of solar PVs to buildings.

The EPAct Tax Incentives

Large, flat roof warehouses, distribution
centers, industrial, and manufacturing buildings are by far
the most popular building categories for rooftop solar PV
projects.
Non-air conditioned
warehouses and manufacturing buildings will fill the $1.80 per
square foot roof tax incentive provided they have existing or
concurrently installed energy efficient lighting at or below
the watts per square foot level (demonstrated on the following
table). To qualify for the $1.80 roof tax incentive the roof
must be installed by December 31, 2016.
The table below shows
the comparison of the previous watts per square foot versus
the current watts per square foot for warehouse and
manufacturing facilities:

Lighting
Warehouse Wattage Targets to Trigger Roof Tax Incentives

Tax Planning with the
Extended Solar Tax Credit

Taxpayers who want to obtain the largest
30% solar tax credit need to commence their project before
January 1, 2020. A construction completion safe harbor needs
to be obtained and the project must be placed in service
before January 1, 2024. The table below illustrates the
gradual phase down of the solar tax credit beginning in the
2020 commencement year down to the 10% credit level for
projects placed in service after December 31, 2023.

The New Solar Tax Credit
Regime

Year
Construction Begins

Placed
in Service Before

Credit

2016

1/1/2024

30%

2017

1/1/2024

30%

2018

1/1/2024

30%

2019

1/1/2024

30%

2020

1/1/2024

26%

2021

1/1/2024

22%

If construction starts before
1/01/2022 and is placed in service after 12/31/2023
the credit is 10%

Rooftop Photovoltaic
Systems

With the recent huge decreases in solar PV
prices, many warehouse owners are using the EPAct tax
incentives to be fiscally and physically prepared for solar.
Fiscally prepared refers to the reduction in current
electricity and heating costs; physically prepared refers to
making the necessary roof improvements to get the building
solar ready.
Solar PV rooftop systems
are often used to generate electricity at warehouses.
Warehouses typically make ideal solar installation candidates
since they often have large, unobstructed flat roofs that can
accommodate large solar PV systems.
In addition to the 30% solar credit, the following are also
available:

Five year Modiﬁed Accelerated Cost
Recovery System (MACRS) deprecation method

50% bonus tax depreciation

Often times, a building
owner may be willing to make the investment for a rooftop
warehouse solar installation if the warehouse tenant will
agree to enter into a power purchase agreement to purchase its
electricity from the building at a set price for a fixed
period of time, usually 15 to 20 years. The building owner can
use a combination of resources to generate an acceptable
economic return. These resources can include:

The power purchase agreement
annual revenue

The solar tax credit

Utility rebates, if available

Green tag emission payments

Net metering electricity payments
for selling the excess power back to the grid

With a power purchase
agreement, a warehouse owner is essentially renting the roof
as an alternate energy electrical generator.

Catching Up on Missed
Deductions

Since the amount of solar tax credit can
vary widely from no credit to 30% based on facts and
circumstances, property owners should work closely with a tax
advisor when starting a solar project.
In January 2011, IRS
released Rev. Proc. 2011-14, which enables all property owners
to catch up on any missed EPAct tax deductions from January 1,
2006 and report them on their current tax return without
having to file an amended tax return, a step that can be
costly and inconvenient. The retroactive filing is
accomplished by filing tax Form 3115 with the warehouse
owner's current tax return. This change can be used
proactively as a tax planning tool.
Warehouse owners who
missed one or more prior tax deductions can combine the missed
project(s) with a new project and secure a much larger
combined tax deduction. For example, presume a warehouse owner
installed energy efficient lighting in a 200,000 square foot
warehouse for $100,000 in 2006 but missed the EPAct tax
deduction. Presume that, in 2016, this same owner has a new
project involving natural gas heaters and some roof
improvements for $260,000. Using Rev. Proc. 2011-14, this
warehouse owner may be eligible to deduct the entire $360,000
in 2016 ($100,000 from 2006 and $260,000 from current
project).
Warehouse owners have
unprecedented opportunities to reduce energy costs,
particularly with energy efficient lighting and natural gas
heaters. Large EPAct tax incentives are available to support
these projects but quick action is required as EPAct is due to
expire Dec. 31, 2016.